Growing Nightmare For Greece

Greece is facing its nightmares: a complete shutdown for a week for its banks. What remained open were the ATMs as people rushed in to withdraw as much cash as possible. But the bigger news is around Greek referendum, which will be a decisive factor for Greece’s destiny. Greece was the first Eurozone country in need of bailouts in 2010 and the years that followed. While it was obvious that many rules in the Eurozone were bent for Greece, the money it needed always remained insufficient for its complete revival. Greece faces a punishing debt repayment schedule in the coming weeks where it owes 1.5 billion euros to IMF on 30th June 2015 and three billion euros to European Central Bank (ECB) in July and August.

Grexit or continue to be a part of Eurozone

June 30th 2015 could be an important turning point for Greece: an exit or repayment of the debt as it reaches its debt repayment deadline. A crisis in Greece will affect markets all across the globe. In fact, they are already are reflected in the stock exchanges across the world. The country is heading for a default and market reactions are the first sign that nothing is going good for Greece. Clearly, market perceptions are that Greece will be unable to meet 1.6 billion euro of loan repayment to the International Monetary Fund. Incase of default on payment, Greece would lose access to any financing from the IMF, including from its existing programme, while it remains in arrears creating a Catch 22 situation. The widespread panic happened last week due to the failing talks between Greece and its creditors. According to European Commission chief, Jean-Claude Juncker, Greece showed a lot of “egotism” in the failed debt talks. Many have argued that a Greece exit is close to impossible since it was not an option. German Economy Minister Sigmar Gabriel said Greek voters would effectively be deciding whether or not they wanted to stay in the eurozone. Greece Prime Minister Tsipras says he will “ respect the outcome” of the memorandum. The question for Greek voters is not whether they want to stay in the euro or not – but it asks Greeks to approve or reject the specific terms laid out by Greece's creditors:

"Should the agreement plan submitted by the European Commission, European Central Bank and the International Monetary Fund to the June 25 euro group and consisting of two parts, which form their single proposal, be accepted? The first document is titled "Reforms for the completion of the Current Program and Beyond" and the second "Preliminary Debt sustainability Analysis."

If the public votes for “Approved/Yes”, the prime minister will have to resign and if it is a “no” then it could be a Grexit from the Euro. European leaders urged for a “yes” vote in Greek referendum. Alexis Tsipras is prepared to negotiate, while also warning that Greece won’t repay €1.6bn to the International Monetary Fund on June 30th 2015, which is the last date of its debt repayment to IMF. Surely, the prime minister does not want an exit from the Eurozone since it has previously tried to negotiate endlessly during meetings but a “ yes” could raise questions on his elected party. While majority has been against austerity as crowds pulled on streets to vote.

Following the Greek voting, credit rating agencies have been busy with downgrading Greek banks. Fitch downgraded major banks of Greece to “restricted default”.

Greece’s Entry in BRICS?

It is still difficult to analyze whether it will be Greece’s loss or the Eurozone’s if Greece exits from the common currency zone. The interesting turning point, however, could be Greece’s debutant membership in BRICS (Brazil, Russia, India, China and South Africa). Greece was invited to be BRICS sixth member by Russia, which could be possible if there is a Greece exit from Eurozone. The invitation for Greece to be a part of BRICS New Development Bank has been “a happy surprise” for Greece Prime Minister Alexis Tsipras. The offer from BRICS for Greece is also well timed and it might not be too surprising if the ailing economy looks at other alternatives to Eurozone. According to Alternate Minister for Social Security Dimitris Stratoulis, the BRICS bank (National Development Bank- NDB) will unconditionally support Greece with financial aid. The five-member bank of BRICS is open to any sovereign member of United Nations. However, if Greece intends to join NDB, it will have to contribute a certain amount and with Greek economy shrinking 25% in the past five years, this might seem difficult if not possible.

Boon or Bane for Greece?

If Greece exits, it could be a bigger issue for Eurozone and Greece will have to fight its own battles with no common currency nation by its side. The Greeks will find their savings getting devalued and Greece could be in financial and political turmoil. It could also choose to go back to its old currency ‘the drachma’. Its exit could also be a leading example to other Eurozone countries that have received bailout packages like Ireland and Portugal. But not only Greece, other Eurozone countries could also face the repercussions of Grexit, which is already reflected through the stock markets. The exit and even failure to repay debt could raise concerns on the authority and functioning of European Central Board and IMF.

But if Greece stayed in the Eurozone, then it might not change much of Greece’s debt position, as has been the case in the past few years. Like the Economist magazine says, “The marriage may endure – but even more unhappily than before“.

Professor at Columbia University. Recipient of the Nobel Memorial Prize in Economic Sciences in 2001 & the John Bates Clark Medal in 1979. Author of "Freefall: America, Free Markets", "The Sinking of the World Economy", "Globalisation and its Discontents" & "Making Globalisation Work".

Nouriel Roubini, a.k.a. “Doctor Doom”, is chairman of Roubini Global Economics and professor of economics at New York University’s Stern School of Business. Roubini has been consistently cited as one of the world’s top global thinkers. This year, he was voted as the most influential economist in the world by Forbes magazine.

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